image missingTrue Value Metrics (TVM)
Meaningful Metrics for a Smart Society
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Date: 2017-09-21 Page is: DBtxt001.php L0700-CC-COST-MNGT-ACCOUNTING


KEY GOAL ... Understanding the behavior of COSTS, PRICES and VALUE
Setting the stage for maximizing profit

Cost, Price and Value ... three key numbers
Cost, price and value are very key numbers about any economic activity. Though modern society is founded on economic activity, and though there are massive datasets about prices. ... that is what a buyer pays for a product or services, and what prices stocks and other financial interests are trading at, what prices commodities are trading at, etc. etc. there is a surprising lack of information about cost and value.
The explanation why there is little information about costs may well be that those that make decisions would be embarrassed at the internal value chain within their organizations.
Corporate accountancy is only about money cost and money price. True Value Accounting (TVA) uses cost, price and value. The value derivatives of cost, price and value are key numbers that describe economic activity. The relationship between these numbers determines the performance of almost any economic activity. All of these measures are important ... any one missing and the understanding of the dynamic of societal progress is compromised.
What is the cost?
There are
Cost and value
Cost and value make it possible to calculate value adding ... something that is very important for society. For this to be of greatest use, the calculation of cost must include not only the money cost but also the value consumed associated with the activity.
What is this? In the case of the oil industry, the costs of crude oil production include payments made for royalties, licenses, etc, as well as the costs of exploration, drilling and extracting the oil from the oilfield, and shipping the product to refineries and to market ... but the costs do not take into account in any financial metric the depletion of the resource, and what it would take to replace this resource. This is a huge problem, because the resource being depleted has taken many millions of years to accumulate, and the cost of this
There are other examples ... see ????
Price and value
In some cases price and value are the same. In this situation the value chain through delivery to the final consumer is extracting from the consumer a price that is equivalent to the value. The consumer does not get anything of the added value. In fact the typical business model is one that aims to extract as much revenue from the market as possible.
The use of resources does not automatically mean that there is either going to be efficient or effective use of resources.

Performance ... Efficiency and Effectiveness
Less Data ... More Information ... Better Understanding
Performance ... Efficiency and Effectiveness
Performance is both efficiency and effectiveness. The profit and loss account summarizes the activities of the organization in money terms showing the revenues and the expenditures. The profit and loss account that is presented to outsiders tends to show the least amount of information allowed by law, while the internal cost, analytical and management accounts will show all the information needed to facilitate good decision making ... decision making that will improve profit performance and help the company achieve its goals.
There is PROGRESS during a period when the STATE at the end of the period (EoP) is better than the STATE at the beginning of the period.
For more on this go to the link

Cost efficiency … how much actual was relative to standard
Cost efficiency is how much the actual cost was relative to what the cost should have been … often expressed as a standard cost. There are many ways to evaluate cost performance including also comparison with activities undertaken in other places or with activities undertaken by other organizations.
Well designed data systems makes it possible to compare how much something actually cost with what it should have cost.
Cost efficiency is a measure of how well something is done. Cost efficiency answers the question about whether or not resources used are more or less than would normally be expected? Comparative cost efficiency answers the question about cost relative to other similar works at another time or in another place.
Cost effectiveness … How much value for the cost?
Well designed data also makes it possible to measure the relationship between the cost and the impact … that is the change in value arising for the community. Cost effectiveness is a measure of how well doing something results in getting the desired impact. Did the use of resources solve the problem that is being addressed or not. Did the use of resources have a favorable impact on the community and quality of life … and was the impact what should have been achieved.
Cost effectiveness is the more complex idea of relating cost to the value of the accomplishment. The idea is simple in theory, but becomes more difficult as the problems being addressed are more complex. TVM uses techniques to get an overall idea of cost effectiveness, and then goes into more detail to assess the way different initiatives contribute to progress. This may require multi-variate analysis of the datasets where there are multiple interventions being used.
TVM accounts for value with as much rigor as possible even though value is perceived differently depending on many subjective elements. TVM uses a system of standard values which makes it possible to compare cost with value on a uniform basis.
Standard costs and standard values facilitate analysis and avoid data overload. Separately TVM allows for the analysis of standard values and the use of this set of metrics to understand differences between societies and to help with the determination of priorities.
External resources complicate analysis. The performance of the community is a function of the amount of external resources needed to maintain a good quality of life. A low performing community is unable to maintain its quality of life without getting external resources. A high performing community needs no external resources to maintain and improve its quality of life.
There are organizations that use large numbers of unpaid volunteers. The labor resource is money free to the organization, but the “opportunity cost” for the volunteers is not zero, and the optimum opportunity for the organization should be bigger than the value of just “stuffing envelopes”!

Disbursement is no way to measure performance
A big reason why public sector budgeting is ineffective
Disbursement is no way to measure performance
The World Bank did a disservice to itself and to the whole process of development by using the amount of loan disbursed as a proxy measure for how much development progress was being made. It was a stupid idea and went on for years.
In the current global malaria control programs, the amount being disbursed is a more prevalent measure than the amount of malaria disease reduction. The idea of effectiveness measurement is missing!
TPB Note: I did my first assignment for the World Bank in 1978 when Robert McNamara was still the President of the Bank. The speed and amount of disbursement was a key metric of Bank performance, and was still an important metric 30 years later. Worse, far too many of the evaluations were done at a superficial level and in many cases by individuals and organizations that were unwilling to risk disappointing their client. My own career was not advanced by me trying to alert Bank staff to issues that needed to be addressed.

Derivatives of Cost, Price and Value

Profit ... derivative of money cost and money price.
The simple definition of profit is based on money cost and money price. In financial accounting and reporting to corporate stakeholders, profit is the key measure that drives everything. Cost and price make it possible to calculate margins and profits ... and this is what is done in normal corporate accountancy and financial reporting. As we shall see later, in modern financial reporting both cost and price are capable of being distorted so that the most favorable margins and profits are being reported ... something that is allowed by self-serving accounting rules (think FASB) but would not be tolerated where professional accountants embrace the fundamental core principles of accountancy.
But profit is more complex in modern financial accounting. Money profit is no longer just the delta between price and profit but might be something else. The accounts may not simply record assets at their cost but on some other basis ... including “mark to market”! This is a wonderful device for taking into account unrealized profit ... simply by recording their value in the balance sheet at a price that the assets could be sold for based on the present market. Fifty years ago, a practice like this would have been banned absolutely based on the prevailing accounting principles ... but lobbying and legislation has overturned old principles and replaced them with laws and rules that are convenient ... in a rising market ... and very dangerous at any other time! Convenience is not a good principle of accounting.
Profit is at the center of the capitalist economic construct ... and is a useful metric as it relates money revenue with money costs, and serves as a useful and practical proxy for performance and productivity. But profit is is not a good proxy for socio-economic performance and the way quality of life in a community changes ... nor the sustainability of the community. In fact, thoughtless optimizing or maximizing of profit is a fairly certain way of creating an unsustainable future.
Value adding ... derivative of value and cost.
If, rather than just money, the metric of performance is value adding ... that is the increment of value from an activity, then there is a very much better measure of progress and performance. Value ... that is value to society ... is almost totally excluded from modern financial and economic metrics. The reasons are many including (1) it has a subjective dimension that makes valuation difficult; and, (2) it has a devastating impact on the norms of financial valuation of corporate activity.
Cash flow ... derivative of money cost and money inflows.
Cash flow is a metric that relates to sustainability in a world where money is the medium of exchange. Cash is used to pay bills. Money inflows may come from revenues which are a function of price, or they come from financing or some change in the balance sheet like sale of assets. Activities that result in a persistent cash deficit will fail in due course, simply because the money runs out. The timing of the demise of the activities may be delayed by borrowing ... but that also will fail in due course.
Activities that have value adding positive and cash flow being positive are sustainable ... and desirable. Activities that are cash flow positive and profitable are money sustainable but maybe not socio-economically sustainable ... and these activities have come to dominate rich developed economies in the post World War II period. By ignoring critical issues of value destruction society had the impression of wealth being created ... but much was mere puffery and the balloons were bound to break. But worse, society built the appearance of wealth while setting the stage for potentially catastrophic global disasters in the future.


Cost Accounting ... What is a Cost Accounting System?
Cost Accounting
What is a Cost Accounting System?
Provided by James R. Martin, Ph.D., CMA Professor Emeritus, University of South Florida
Open file 12856 Open external link

Cost Accounting in the Manufacturing Company

Cost Accounting
Cost Accounting in the Manufacturing Company
Material Flow Cost Accounting as an Approach to Improve Resource Efficiency in Manufacturing Companies
Mario Schmidt 1,* and Michiyasu Nakajima 2
Open file 12855 Open PDF ... Material-Flow-Cost-Accounting


This 8 page pdf describes some of the work that HM Treasury has been doing to improve the performance of a variety of initiatives. The takeaway from this paper is that HM Treasury is doing significant work without being able to learn very much from the work. The essence of good cost accounting is to develop data that enables decision making that will result in better performance. Good cost accounting has to be based on an understanding of the aims of the organization, how an organization functions, how it makes decisions and what constitutes better performance. Without this sort of understanding, the work will cost a lot and produce very little.
Open PDF ... HMG-Treasury-Unit-Costing-Project

Standard Costing and Variance Analysis
Less Data ... More Information ... Better Understanding
Standard costing is a powerful methodology that helps in the understanding of how costs behave. Most 'actual' cost accounting systems have an enormous overhead cost, lots of data, and relatively little useful information. Most of the effort goes into understanding the data and rather little into understanding what is going on with the costs themselves, whether it is a product cost of a process cost.
A standard cost system enables a massive reduction in the amount of data needed, and allows for much more thinking about hose the product or process can be improved so that costs are improved.
TPB commentary: I introduced a standard cost system when I was the CFO for Southern States Inc., a company manufacturing air break switches for the electric utility industry. One of the deapartments was a foundry that produced upwards of 10,000 different castings, most of them in relatively small quantities. An existing 'actual cost system' was expensive with lots of paperwork and massive amounts of data. It did not help at all. Worse, a simple performance metrics used in the foundry for many years ... unit cost per pound of casting ... had resulted in the engineering design department attempting to cost reduce the castings by designing them to weigh less. The development of a 'standard cost' system radically simplifed the analysis system. Every casting, no matter what the detail design went through several steps. Estimating the cost of each of these steps was relatively eays and quite accurate. Some of the steps cost the same no matter what the weight. Other steps varied according to weight. A standard cost for each product could be computed easily based on the characteristices of the casting.
Variance analysis made it possible to get some understanding of how the standard costs related to the actual cost. Multiplying the production quantity for each casting times the standard cost for each casting gave a total standard cost for the foundry (and the different sections of the foundry). The accounting system produced the actual costs fot the foundry for the period (and the sections), and comparing the two enabled assessment to be made about the performance of the foundry. The difference ... or variance ... helped to improve the accuracy of the standards and helped to improve the design of the castings and helped to improve the performance of the processes in the foundry. The standard cost system was relatively simple, but it was a powerful tool to improve the performance of the organization.

The text being discussed is available at

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